Time-Inconsistent Control Theory with Finance Applications

This book is about time-inconsistent control theory with finance applications. It discusses how time inconsistency affects optimal decision-making and presents solutions using game-theoretic frameworks. The theory is illustrated with examples from finance, such as mean-variance portfolio choice and market equilibrium with time-inconsistent preferences.

Format: Paperback / softback
Length: 326 pages
Publication date: 04 November 2022
Publisher: Springer Nature Switzerland AG

In dynamic choice problems, time inconsistency is the rule rather than the exception. Indeed, as Robert H. Strotz pointed out in his seminal 1955 paper, relaxing the widely used ad hoc assumption of exponential discounting gives rise to time inconsistency. Other famous examples of time inconsistency include mean-variance portfolio choice and prospect theory in a dynamic context. For such models, the very concept of optimality becomes problematic, as the decision-makers preferences change over time in a temporally inconsistent way. In this book, a time-inconsistent problem is viewed as a non-cooperative game between the agents current and future selves, with the objective of finding intrapersonal equilibria in the game-theoretic sense. A range of finance applications are provided, including problems with non-exponential discounting, mean-variance objective, time-inconsistent linear quadratic regulator, probability distortion, and market equilibrium with time-inconsistent preferences.

Time-inconsistent control theory with finance applications offers the first comprehensive treatment of time-inconsistent control and stopping problems, in both continuous and discrete time, and in the context of finance applications. Intended for researchers and graduate students in the fields of finance and economics, it includes a review of the standard time-consistent results, bibliographical notes, as well as detailed examples showcasing time inconsistency.

In dynamic choice problems, time inconsistency is the rule rather than the exception. Indeed, as Robert H. Strotz pointed out in his seminal 1955 paper, relaxing the widely used ad hoc assumption of exponential discounting gives rise to time inconsistency. Other famous examples of time inconsistency include mean-variance portfolio choice and prospect theory in a dynamic context. For such models, the very concept of optimality becomes problematic, as the decision-makers preferences change over time in a temporally inconsistent way. In this book, a time-inconsistent problem is viewed as a non-cooperative game between the agents current and future selves, with the objective of finding intrapersonal equilibria in the game-theoretic sense. A range of finance applications are provided, including problems with non-exponential discounting, mean-variance objective, time-inconsistent linear quadratic regulator, probability distortion, and market equilibrium with time-inconsistent preferences.

In dynamic choice problems, time inconsistency is the rule rather than the exception. Indeed, as Robert H. Strotz pointed out in his seminal 1955 paper, relaxing the widely used ad hoc assumption of exponential discounting gives rise to time inconsistency. Other famous examples of time inconsistency include mean-variance portfolio choice and prospect theory in a dynamic context. For such models, the very concept of optimality becomes problematic, as the decision-makers preferences change over time in a temporally inconsistent way. In this book, a time-inconsistent problem is viewed as a non-cooperative game between the agents current and future selves, with the objective of finding intrapersonal equilibria in the game-theoretic sense. A range of finance applications are provided, including problems with non-exponential discounting, mean-variance objective, time-inconsistent linear quadratic regulator, probability distortion, and market equilibrium with time-inconsistent preferences.

Weight: 528g
Dimension: 235 x 155 (mm)
ISBN-13: 9783030818456
Edition number: 1st ed. 2021